The headlines are littered with bubble warnings.
Of course, that’s been true every day for 18 months. In fact, it’s been true every single day for time immemorial.
Jeremy Grantham is out of superlatives. And that’s really saying something. Finding new synonyms for the word “bubble” is basically his life’s work. “We’ve never seen anything like this,” he told Bloomberg late last week. “Every bull market before this one had low inflation.”
Laborious efforts to systematize the process notwithstanding, it’s impossible to say, definitively, when the broad market is a bubble. There are always pockets of speculative excess. Folks like Grantham remind me a bit of shoppers lured by every sale they see and every deal they spot. There’s always a deal somewhere. Something you want is always on sale. No matter the state of the market (broadly construed), some asset, somewhere, is ludicrously expensive or otherwise detached from the fundamentals. Irrespective of how the economy is doing at a given time, somebody is playing the greater fool game with somebody else, paying up for something that has no value.
In the immediate aftermath of the initial pandemic shock, day-traders bid up shares of companies on the brink of insolvency. In at least one high-profile case, retail investors furiously bought the equity of bankrupt Hertz. A few months later, they harnessed options dynamics to drive up the price of mega-cap US tech. Six months later, 90s nostalgia took over, manifesting in the meme stock mania.
Fast forward to November and pre-revenue EV makers are all the rage. Rivian rose a fifth day Tuesday to become the biggest US company with no sales. It overtook Volkswagen’s market cap in the process (figure below).
Lucid is more valuable than Ford.
It’s easy to blame central banks. “There is still an emergency level of liquidity flowing into the system long after the emergency has passed,” Miller Tabak’s Matt Maley told Bloomberg.
As if that explains everything. Nobody would be speculating on meteoric gains for EVs or betting on recent IPOs to keep climbing were it not for the Fed’s monthly bond-buying, apparently.
Clearly, liquidity matters. Especially the “flow effect” (as distinct from the “stock effect,” or the impact of central banks sequestering risk-free assets on their balance sheets). But let’s not kid ourselves. Humans are prone to speculation and greed. It’s why they go to casinos and play the lottery despite knowing the odds of success (any kind of success) are long.
The linked Bloomberg article carried this headline: “Rivian Leaps Past Volkswagen’s Valuation as EV Mania Rages.” If that sounds familiar, it should. On September 9, 2020, Stan Druckenmiller called US stocks “an absolute raging mania.” To his credit, Druckenmiller also suggested inflation was about to spike, but that’s another discussion. In May of 2021, on the one-year anniversary of his declaration that equities represented the “worst risk-reward of my career,” Druckenmiller said he was up 42% in 2020. Then, he proceeded to deride anyone who isn’t him, telling CNBC that “a monkey could make money in this market.”
And that really gets to the heart of the issue for folks like Druckenmiller and Grantham. In my opinion, they don’t like it when “monkeys” make money because it raises questions about why we need folks like them. Of course, decrying your gains is uncouth, so they avoid that (except when Druckenmiller implicitly calls you a monkey), instead putting the blame on central banks. Howard Marks did something similar in 2020, as did Warren Buffett. Both men suggested (tacitly) that were it not for the Fed’s quick action, they’d have capitalized off the market plunge and ensuing economic collapse.
Remember: They win either way. The wealthy own most of the equities, so when stocks hit record after record after record, they make hundreds upon hundreds of millions of dollars by default. Then they go on television and pretend to be aggrieved at Fed policy.
Sometimes, the wealthy will decry the extent to which central banks have exacerbated inequality by inflating the value of financial assets in the very same interviews during which they chide regular people for scoring triple-digit gains on speculative bets. (“Populist” finance blogs never demonstrate much interest in highlighting that cognitive dissonance, mostly because they struggle with their own psychological entanglements, one of which involves the juxtaposition between a pitiable penchant for billionaire investor hero worship and ostensible concern for regular people.)
Apparently, the only acceptable state of affairs for folks like Marks, Druckenmiller and Buffett is one in which markets are i) free enough for exploitable discrepancies to present themselves to billionaires at regular intervals, ii) not free enough for those discrepancies to manifest in ways that bankrupt too many hedge funds and, crucially, iii) stable enough that stocks rise over time so that everyday people can enjoy ~9% annual gains, sufficient to pacify the masses, but safely lower than the kind of big scores which might blur the lines that define the social pyramid and define the caste system.
I think that about covers it.
I think Adam Smith warned “philosophers” from sympathizing with the Titans of Wealth the way the crowd does. I would guess he made as much fun of it as you do.
Before the central banks can make everyone rich they will make everyone poor, that’s what the billionaires are afraid of. But they had a good run and will just jump from their penthouses, the rest of us will be eating out of dumpsters dreaming of getting ahead like usual
Love how this commentary puts these “high-flyers” into perspective. Druckenmiller’s monkey comment is hilarious. I recall reading about it earlier this year.
Of course, realizing the implication that monkeys can parallel his success may raise a question about his management veracity in his own mind, he won’t actually worry about the monkeys taking over. People with real money will continue to use his services simply because they don’t want to manage money themselves.
Furthermore, monkeys like me invest in small-caps.
Years ago I had a colleague who loved to prowl flea markets and estate sales for antiques and other junk which he could buy cheap and resell. He told me a story about this one lamp he found in a box of mixed old junk at an estate sale. He bought the box for $5, kept the lamp, which didn’t work, and threw everything else away. For another $5 he fixed the lamp, cleaned it up and found a willing buyer to whom he sold the lamp for $50, a 400% profit inside of a week. A week later he was in the shop of his buyer and saw the lamp marked at $80. Another week later, the lamp was gone. About a month after he sold the lamp he was in a nearby town looking for bargains when he spotted the lamp once again, priced at $175. Somehow this story seems to be repeating itself in the market over and over. God, people can be so stupid.
H-Man, the immortal words of “irrational exuberance” were uttered by Greenspan two years before the market collapsed. Not sure where we are on that timeline.